October 02, 2012

He Makes Money The Old Fashioned Way. He Prints it.

Yesterday, Federal Reserve Chairman Ben Bernanke used a
presentation he had been scheduled to give to the Economic Club of Indiana as a platform to make
a vigorous defense of his latest plans to engage in quantitative easing via
the printing press.

As our readers are well aware, monetary policy and macroeconomics are
very complex subjects, so we thought we’d go through the highlights of his
speech to help you better understand it:

“Since 2008, we've used… less-traditional monetary
policy tools to bring down longer-term rates. The first of these
less-traditional tools involves the Fed purchasing longer-term securities on
the open market--principally Treasury securities and mortgage-backed securities…”

Some tools are less traditional for a reason. Like when Alexander P.
Broughton, a 20-year-old University of Tennessee student, used a “less
traditional tool” to get drunk.
(You probably don’t want to click on that.)

“The securities
that the Fed purchases in the conduct of monetary policy are held in our
portfolio and earn interest. The great bulk of these interest earnings is sent
to the Treasury, thereby helping reduce the government deficit. In the past
three years, the Fed remitted $200 billion to the federal government.”

If you’re wondering why, if we can reduce the deficit by purchasing
Treasury bills with fake money and turning the fake interest payments back in
to Treasury, why don’t we just have the Fed purchase all the treasury bills,
well, good news!

“I sometimes hear
the complaint that the Federal Reserve is enabling bad fiscal policy by keeping
interest rates very low and thereby making it cheaper for the federal
government to borrow. I find this argument unpersuasive. The responsibility for
fiscal policy lies squarely with the Administration and the Congress.”

Exactly. It would be like if someone blamed you for giving
whiskey and car keys to a teenager.
The responsibility for not plowing into a crowd of young schoolchildren
at a bus stop lies squarely with the teenager, not with you.

And keep in mind, the Fed’s actions are in no way political. In fact, in
response to the suggestion that the Fed should stop interfering so aggressively
in the markets and allow rates to rise, Mr. Bernanke said:

“Using monetary
policy to try to influence the political debate on the budget would be highly
inappropriate.”

Exactly. Were the Fed to cease intervening in markets and
allow interest rates to float at normal levels so that prices could adjust and
markets could go through the painful but efficient process of healing as
market-clearing prices are established, it would clearly “influence the political
debate” and be “highly inappropriate.”

In contrast, actively forcing on the markets historically unprecedented
low interest rates and running the printing presses so as to purchase
government bonds with
the express purpose of inflating financial asset prices just one month
before a presidential election regardless of the long-term consequences is 100%
non-partisan straightforward policy making.

That is how you can tell Ben Bernanke is serious about
maintaining the credibility of the Fed.

“[An important
question] is whether the Federal Reserve's monetary policy will lead to higher
inflation down the road. In response, I will start by pointing out that the
Federal Reserve's price stability record is excellent, and we are fully
committed to maintaining it.”

“With monetary
policy being so accommodative now, though, it is not unreasonable to ask
whether we are sowing the seeds of future inflation. A related question I
sometimes hear--which bears also on the relationship between monetary and
fiscal policy, is this: By buying securities, are you "monetizing the
debt"--printing money for the government to use--and will that inevitably
lead to higher inflation? No, that's not what is happening, and that will not
happen.”

We don’t know about you, but we sure feel a lot better.

“Monetizing the
debt means using money creation as a permanent source of financing for
government spending.”

You see, “monetizing the debt” is when you print money forever, whereas
Fed policy is to print money until the “appropriate time.”

And they won’t tell us when that appropriate time will be, only that it
will depend on how much the economy strengthens.

There is an argument to be made against the 98% number that is often kicked around and is typically based on the value of gold. I used the 95% number because it is based on various baskets of goods and was even largely verified by the self-appointed fact checkers, if reluctantly. (I could have used a better link to make that clear.) There are some problems with that as you note, but there are enough comparables that I consider it clear that the "value" of a dollar has taken a giant hit (whereas the value of gold, hasn't).

As for laugh-out-loud tests, I agree totally. In fact, I thought his speech reads in large part as part parody, which is why I quoted it so extensively. Hey, if he's going to do my work for me, why not let him?

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